UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17147
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
(Exact name of registrant as specified in its charter)
Delaware 04-2798638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No
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Page 1 of 10
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
BALANCE SHEETS
February 28, 1995 and August 31, 1994
(Unaudited)
ASSETS
February 28 August 31
Real estate investments:
Investment property held for sale $ 4,720,000 $ 4,720,000
Investment in operating property 250,000 250,000
Land 1,150,000 1,150,000
Mortgage loans receivable 9,185,000 9,185,000
15,305,000 15,305,000
Cash and cash equivalents 1,951,183 1,853,703
Interest receivable 85,099 85,099
Tax and tenant security deposit escrows 48,846 71,153
Prepaid expenses 5,548 17,926
Deferred expenses, net 15,250 17,081
$17,410,926 $17,349,962
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 19,373 $ 19,373
Accounts payable and accrued expenses 51,615 82,381
Tenant security deposits 13,149 14,240
Partners' capital 17,326,789 17,233,968
$17,410,926 $17,349,962
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended February 28, 1995 and 1994
(Unaudited)
General Limited
Partners Partners
Balance at August 31, 1993 $ 7,063 $17,120,134
Net income 7,150 700,727
Cash distributions (6,458) (632,838)
BALANCE AT FEBRUARY 28, 1994 $ 7,755 $17,188,023
Balance at August 31, 1994 $ 8,142 $17,225,826
Net income 7,395 724,722
Cash distributions (6,458) (632,838)
BALANCE AT FEBRUARY 28, 1995 $ 9,079 $17,317,710
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME
For the three and six months ended February 28, 1995 and 1994
(Unaudited)
Three Months Ended Six Months Ended
February 28, February 28,
1995 1994 1995 1994
REVENUES:
Interest from mortgage
loans $ 255,297 $ 255,297 $ 510,594 $510,594
Land rent 54,429 41,338 88,823 92,249
Interest earned on short-
term investments 27,022 13,890 49,709 27,729
Other income 7,255 6,898 13,529 12,751
344,003 317,423 662,655 643,323
EXPENSES:
Management fees 22,602 22,602 45,203 45,203
General and administrative 111,099 84,842 179,738 175,046
Amortization of deferred
expenses 916 916 1,831 1,831
134,617 108,360 226,772 222,080
Operating income 209,386 209,063 435,883 421,243
Income from operations of
investment property held
for sale, net 143,701 141,787 296,234 286,634
NET INCOME $ 353,087 $ 350,850 $ 732,117 $ 707,877
Net income per Limited
Partnership Unit $9.77 $ 9.71 $20.25 $19.58
Cash distributions per Limited
Partnership Unit $8.84 $ 8.84 $17.68 $17.68
The above net income and cash distributions per Limited Partnership Unit are
based upon the 35,794 Units of Limited Partnership Interest outstanding during
each period.
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CASH FLOWS
For the six months ended February 28, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
1995 1994
Cash flows from operating activities:
Net income $ 732,117 $ 707,877
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of deferred expenses 1,831 1,831
Changes in assets and liabilities:
Tax and tenant security deposit escrows 22,307 21,555
Prepaid expenses 12,378 7,675
Accounts payable - affiliates - (28,925)
Accounts payable and accrued expenses (30,766) (24,141)
Tenant security deposits (1,091) (1,007)
Total adjustments 4,659 (23,012)
Net cash provided by operating activities 736,776 684,865
Cash flows from financing activities:
Distributions to partners (639,296) (639,296)
Net increase in cash and cash equivalents 97,480 45,569
Cash and cash equivalents, beginning of period 1,853,703 1,769,705
Cash and cash equivalents, end of period $ 1,951,183 $ 1,815,274
See accompanying notes.
1.General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended August 31, 1994.
In the opinion of management, the accompanying financial statements, which
have not been audited, reflect all adjustments necessary to present fairly
the results for the interim period. All of the accounting adjustments
reflected in the accompanying interim financial statements are of a normal
recurring nature.
2.Mortgage Loan and Land Investments
The outstanding first mortgage loans and the cost of the related land to the
Partnership at February 28, 1995 and August 31, 1994 are as follows:
Amount of
Property Mortgage Loan Cost of Land
Appletree Apartments $ 4,850,000 $ 650,000
Omaha, NE
Woodcroft Shopping Center
Durham, NC
Phase I 3,100,000 360,000
Phase II 1,235,000 140,000
$ 9,185,000 $1,150,000
The interest rates on the mortgage loans range from 11% to 11.25% per annum.
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the
gross revenues from the operating properties in excess of a base amount, as
defined. For the six months ended February 28, 1995, additional rent of
$24,948 was earned from the Woodcroft Shopping Center investment. For the
six months ended February 28, 1994, additional rent of $28,374 was earned
from the Woodcroft Shopping Center investment. The lessees have the option
to purchase the land for specified periods of time, as discussed in the
Annual Report, at a price based on fair market value, as defined, but in no
event less than the original cost to the Partnership. As of February 28,
1995, no options to purchase the land were exercisable. The Partnership's
investments are structured to share in the appreciation in value of the
underlying real estate. Accordingly, upon either sale, refinancing, maturity
of the mortgage or exercise of the option to purchase the land, the
Partnership will receive a 33% to 50% share of the appreciation above a
specified base amount.
3.Investment Properties
As discussed in the Annual Report, the Partnership foreclosed under the terms
of the mortgage loan secured by Westside Creek Apartments on March 23, 1989
due to nonpayment of the required debt service. The Adviser has employed a
local property management company to conduct the day-to-day operations of the
property under the direction of the Managing General Partner. The property
consists of 142 units and is located in Little Rock, Arkansas. The net
carrying value of the Partnership's investment in the Westside Creek
Apartments, of $4,720,000, is classified as investment property held for sale
on the accompanying balance sheets as of February 28, 1995 and August 31,
1994.
The Partnership recognizes income from the operations of investment property
held for sale in the amount of the excess of the property's gross revenues
over the sum of property operating expenses (including capital improvement
costs), taxes and insurance.
Summarized operating results of the Westside Creek investment property for
the three and six months ended February 28, 1995 and 1994 are as follows:
Three Months Ended Six Months Ended
February 28, February 28,
1995 1994 1995 1994
Rental income $232,285 $227,459 $471,505 $460,382
Other income 8,821 8,111 16,901 16,293
241,106 235,570 488,406 476,675
Property operating expenses 76,744 73,419 150,844 148,391
Property taxes and insurance 20,661 20,364 41,328 41,650
97,405 93,783 192,172 190,041
Income from operations, net $143,701 $141,787 $296,234 $286,634
During the quarter ended February 28, 1995, the Partnership executed a
purchase and sale agreement to sell the Westside Creek Apartments to an
unaffiliated third party for $6,775,000. Subsequent to the end of the
quarter, the prospective purchaser, which is a national pension fund advisor,
encountered internal tax regulation compliance issues related to the sale.
It now appears likely that this transaction will not close. Accordingly,
management has begun to actively re-market the property to other potential
buyers.
Also, as discussed in the Annual Report, an affiliate of the Partnership,
which held the mortgage and land lease on the Cordova Creek Apartments,
foreclosed on the property in fiscal 1990 due to nonpayment of the required
interest payments. The Partnership had held a 3.5% interest in the mortgage
loan and land investments through an agreement with this affiliate.
Subsequent to foreclosure, the Partnership recorded its investment at the net
combined carrying value of its previous interest in the land and mortgage
loan of $250,000. The Partnership's investment, which currently consists of
a 3.5% equity ownership in the operations and eventual sales proceeds of the
Cordova Creek property, is accounted for on the cost method. Distributions
to the Partnership from operations are recorded as other income when
received. During the quarter ended February 28, 1995, the affiliate which
holds title to the operating property entered into a purchase and sale
agreement to sell the Cordova Creek Apartments to an unaffiliated third
party. The Partnership's share of the net sale proceeds at the negotiated
sales price would reflect a small premium over the Partnership's cost basis
of $250,000 for its 3.5% interest in Cordova Creek. Closing of this proposed
sale transaction is scheduled to occur by the end of April 1995. However,
there can be no assurances that this sale transaction will be consummated.
4. Related Party Transactions
The Adviser earned basic management fees of $45,203 for each of the six-month
periods ended February 28, 1995 and 1994. Accounts payable - affiliates at
both February 28, 1995 and August 31, 1994 consists of management fees of
$19,373 payable to the Adviser.
Included in general and administrative expenses for the six months ended
February 28, 1995 and 1994 is $89,443 and $78,254, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the six months ended
February 28, 1995 and 1994 is $3,034 and $1,965, respectively, representing
fees earned by Mitchell Hutchins Institutional Investors, Inc. for managing
the Partnership's cash assets.
5.Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As previously reported, in January 1995 the Partnership executed a purchase
and sale agreement to sell the Westside Creek Apartments to an unaffiliated
third party for $6,775,000. Subsequent to the end of the current quarter, the
prospective purchaser, which is a national pension fund advisor, encountered
internal tax regulation compliance issues related to the sale. It now appears
likely that this transaction will not close. Accordingly, management has begun
to actively re-market the property to other potential buyers. The Westside
Creek investment was originally made by the Partnership on July 1, 1985 and was
structured as a ground lease and first leasehold mortgage loan. A total
investment of $4,850,000 was made in 1985, comprised of land purchased for
$215,000 and a $4,635,000 mortgage loan secured by the improvements. The
original fixed return on the Partnership's investment was 11.25% per year.
During 1988, the borrower experienced financial problems at this property due to
the overbuilt Little Rock apartment market and eventually defaulted under the
terms of the ground lease and mortgage loan. On March 23, 1989, the Partnership
foreclosed and took title to the property. At the time of the takeover, the
property was 76% occupied and poorly managed. The Partnership selected a local
property management company to operate Westside Creek and, during 1990 and 1991,
implemented a capital improvement program to upgrade the units and common areas.
For the past several years, Westside Creek has maintained an average occupancy
level of close to 95%. Management believes that the negotiated sales price in
the aforementioned purchase and sale agreement reflects the current fair market
value of the property. As a result, the Partnership expects to realize a
substantial gain over its original investment upon the eventual sale of the
Westside Creek property.
Also during January 1995, the affiliated partnership which holds the title
to the Cordova Creek Apartments entered into a sales contract with an
unaffiliated third party to sell the property for $9,100,000. The Partnership
has an ownership interest of 3.5% in the Cordova Creek property. The
Partnership's share of the net proceeds at the negotiated sale price is
expected to total approximately $300,000, which would reflect a small premium
over the Partnership's cost basis of $250,000 for its 3.5% interest in Cordova
Creek. Closing of this proposed transaction is scheduled to occur by the end of
April 1995. However, there can be no assurances that this transaction will be
consummated.
Operations of the properties securing the Partnership's two remaining
mortgage loan investments remained strong during the first six months of fiscal
1995 and continue to fully support the debt service and land rent payments owed
to the Partnership. During the six months ended February 28, 1995, the
Partnership received additional rent of $24,948 under the terms of the Woodcroft
Shopping Center ground lease because cash flow from the property was in excess
of certain base amounts specified in the lease agreement. Leasing levels at the
Appletree Apartments and Woodcroft Shopping Center were 96% and 99%,
respectively, as of February 28, 1995. The mortgage loans secured by the
Appletree Apartments and Woodcroft Shopping Center bear interest at annual rates
of 11.00% and 11.25%, respectively. With real estate market conditions
improving along with the state of the overall economy, and with credit in the
capital markets for real estate transactions more accessible than in prior
years, it is possible, although not certain given the recent increase in
interest rates, that the current loans secured by these projects could be
refinanced at lower rates. However, the Appletree loan includes a prepayment
premium for any prepayment between May 1994 and April 1998 at rates between 5%
and 1.25% of the mortgage loan balance. In addition to repaying the outstanding
mortgage loans, the borrowers would also have to exercise their options to
purchase the related land as part of any prepayment transaction, including in
such purchase the Partnership's share, if any, of the property's appreciation
called for under the terms of the ground lease. As a practical matter, this
requirement could make it difficult for the borrowers to finance a prepayment
transaction. Nonetheless, it is possible that the loans secured by the
Woodcroft Shopping Center and/or the Appletree Apartments could be prepaid in
the near term.
At February 28, 1995, the Partnership had available cash and cash
equivalents of approximately $1,951,000. Such amounts will be used for the
working capital needs of the Partnership and for distributions to the partners.
The source of future liquidity and distributions to the partners is expected to
be through cash generated from the Partnership's real estate investments, the
repayment of the mortgage loans receivable and the future sales or refinancings
of the underlying land and the investment properties. Such sources of liquidity
are expected to be adequate to meet the Partnership's needs on both a short-term
and long-term basis.
RESULTS OF OPERATIONS
The Partnership's net income increased by approximately $24,000 for the
six-month period ended February 28, 1995, when compared to the same period in
the prior year. This increase in net income was the result of an increase in
interest earned on short-term investments and an increase in income from
operations of the investment property held for sale. Interest earned on short-
term investments increased by approximately $22,000 for the six months ended
February 28, 1995 as a result of an increase in the interest rates earned on
such investments when compared to the prior period. Income from the operations
of the Westside Creek Apartments property increased by approximately $10,000 for
the current six-month period mainly due to a small increase in rental revenues,
which is primarily attributable to an increase in effective rental rates. The
favorable changes in net income for the six months ended February 28, 1995 were
partially offset by a decrease in land rents of approximately $3,000, which
resulted from a decrease in additional rent received from the Woodcroft Shopping
Center investment in the current period, and an increase in general and
administrative expenses of approximately $5,000, which resulted from certain
legal expenses incurred in conjunction with the proposed sale of the Westside
Creek Apartments. Similar changes in interest earned on short-term investments,
Westside Creek revenues and general administrative expenses account for the net
increase of approximately $2,000 in net income for the three months ended
February 28, 1995, when compared to the same period in the prior year. In
addition, an increase in land rent revenue for the most recent three-month
period contributed to the improvement in net income for the current quarter.
The change in land rent revenue for the current quarter is strictly related to
the timing of the receipts of supplemental rent payments under the terms of the
Woodcroft ground lease. Such revenues are recognized in the period in which the
cash is received.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
defendants, including Third Qualified Properties, Inc. and Properties
Associates, which are the General Partners in the Partnership and affiliates of
PaineWebber.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in PaineWebber Qualified Plan
Property Fund Three, LP, PaineWebber, Third Qualified Properties, Inc. and
Properties Associates (1) failed to provide adequate disclosure of the risks
involved; (2) made false and misleading representations about the safety of the
investments and the Partnership's anticipated performance; and (3) marketed the
Partnership to investors for whom such investments were not suitable. The
plaintiffs, who purport to be suing on behalf of all persons who invested in
PaineWebber Qualified Plan Property Fund Three, LP, also allege that following
the sale of the partnership interests, PaineWebber, Third Qualified Properties,
Inc. and Properties Associates misrepresented financial information about the
Partnership's value and performance. The amended complaint alleges that
PaineWebber, Third Qualified Properties, Inc. and Properties Associates violated
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs seek unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also seek treble damages
under RICO. The defendants' time to move against or answer the complaint has
not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual
obligations, under certain circumstances the Partnership may be required to
indemnify Third Qualified Properties, Inc., Properties Associates and their
affiliates for costs and liabilities in connection with this litigation. The
General Partners intend to vigorously contest the allegations of the action, and
believe that the action will be resolved without material adverse effect on the
Partnership's financial statements, taken as a whole.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
By: THIRD QUALIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: April 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's interim financial statements for the six months ended February 28,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> FEB-28-1995
<CASH> 2,000,029
<SECURITIES> 0
<RECEIVABLES> 9,270,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,090,676
<PP&E> 6,120,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,410,926
<CURRENT-LIABILITIES> 84,137
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 17,326,789
<TOTAL-LIABILITY-AND-EQUITY> 17,410,926
<SALES> 0
<TOTAL-REVENUES> 958,889
<CGS> 0
<TOTAL-COSTS> 226,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 732,117
<INCOME-TAX> 0
<INCOME-CONTINUING> 732,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 732,117
<EPS-PRIMARY> 20.25
<EPS-DILUTED> 20.25
</TABLE>
